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40% Price Drop On Chinese EV Batteries Spells Trouble For Tesla

40% Price Drop On Chinese EV Batteries Spells Trouble For Tesla

Submitted by Silver2K on January 20, 2017

A cornerstone of the Tesla story may be crumbling amid indications that the company's envisioned battery price advantage could evaporate long before the company's Gigafactory has gone into full swing. An analyst note from Morgan Stanley says that Chinese battery suppliers may cut their prices by 35%-40% in 2017, while still making a profit. On Thursday, shares of electric vehicle battery maker Samsung SDI dropped 4% on the news, while competitor LG Chem was down 1.8%. Tesla stock was unchanged in after-hours trading.

In the note cited by Barrons, Morgan Stanley analyst Shawn King said:

“According to Gaogong Industry Institute, some EV makers in China have proposed that battery vendors cut prices by 35-40% in 2017. Our China analyst Jack Lu sees this proposal as likely to proceed, as some battery vendors in China could still make a decent profit after such a cut.”

Morgan Stanley sees this as negative for South Korean EV battery suppliers Samsung SDI and LG Chem, but any sharp price erosion on the battery front would imperil the viability of Tesla Motors’ Gigafactory in Reno, Nevada. The success of this undertaking depends on two factors: That Tesla is able to sell enough electric cars (along with a few stationary batteries they call powerwalls) to keep the ginormous factory busy. And on Tesla’s ability to make the batteries for less money than what’s offered by a supplier.

When Tesla floated the Gigafactory idea to investors three years ago, a 30% price advantage was envisioned. Since then, Tesla’s projections have not changed. The company’s website still says that the company expects “to drive down the per kilowatt hour (kWh) cost of our battery pack by more than 30 percent.”

Sure, unabashed Tesla-promoter Dan Dolev at Jefferies projected possible Gigafactory savings of “50%+ by 2020.” He also gave the Tesla share a $365 price target in 2015. On the other side, MIT’s Technology review talked to experts who would concede Tesla's in-house battery production only a 15% cost advantage by 2020. Regardless of where you stand on this issue, if EV batteries can be bought for much less this year in China than when produced by 2020 in Nevada, the Gigafactory, and with it a cornerstone of Tesla’s strategy and outsized valuation is in serious trouble.

Meanwhile, even the most ardent fans of in-house battery production now say it’s a bad idea. In the week before Christmas, Carlos Ghosn, co-CEO of Nissan and Renault, owners of several battery factories, told me that these days, making your own batteries is stupid if you can buy them for less from a willing supplier:

“Many battery suppliers have come to the market, and they are not small companies. They are powerhouses with a lot of technology, ready to invest. In our point of view, making our own battery is no longer as crucial as it was in 2008. As carmakers, we need to develop the technology nobody has, but when the technology is available outside, we should externalize.”

The way things stand, Tesla is gearing up its $4 bln Gigafactory to make old tech for more, a sure-fire recipe for disaster. To make matters worse for Tesla, the Morgan Stanley note is by one of the most brazen of the Tesla advocates. Last year, however, Morgan Stanley begun dimming its rose-colored glasses a bit.

I don't see how this spells trouble for Tesla at all. They still need to produce enough batteries to build huge battery packs for over 100,000 cars per year. Right now and for the foreseeable future, Tesla can't simply go out and buy batteries at this quantity. The problem is capacity, which this article ignores. Vertical integration is still very valuable at this stage of the battery and electric vehicle industry.

Plus they are talking about a difference of 5% at most, Chinese say 35% reduction, Tesla says 30% reduction minimum (not accounting for any tech. advances or innovation that happens at that site). This article also assumes that they both can produce batteries for the same cost which this shotty article gives no information either way. In any case I highly doubt that the potential 5% cost difference is worth the trade off for the design control and supply chain control that their vertical integration affords them.

Rocky_H |
January 20, 2017

I saw someone posted this on Tesla's Facebook page, and I gave a dose of reality there too. Remember when those "hoverboard" self balancing scooters were catching fire at an incredibly alarming rate and were being banned from all over the place? The problem with them was found to be the really cheap and low quality Chinese lithium ion batteries that were being put into them. Cheap = cheap, so you get what you pay for. Samsung and Panasonic make really good quality batteries that don't take risky shortcuts in the production process or materials.

So no, I don't really see a risk to Tesla in this. They are going to use (and make) good quality batteries.

TeslaTap.com |
January 20, 2017

I can see the new China cars using these batteries:

The Smoker
Flamethrower 500
Go n' Stop

And some new taglines:

"The Smoker uses a disposable Li battery - just replace every 3 months!"
"You didn't trust our ICE cars, now can get the same comfort from our EVs!"
"We don't need a heater as the battery heats the car all by itself!"

I have zero concern these cheap batteries will be used in anything other than the next hoverboard or perhaps some cheap chinese EVs that are never exported.

dchuck |
January 20, 2017

Tesla hasn't spent 4 Billion at the Gigafactory yet. The article gives the reader no useful information. What type of Cells are we talking about? what is the current price of the batteries?

if the Chinese cells are cheaper but of lousy quality (as Rocky_H spoke of) Tesla has no worries. If the Chinese cells are of good quality and are cheaper in price. Tesla can just stop development of the Gigafactory today and purchase cheaper Chinese sells making MORE profit on the 300-400k Model 3's they hope to sell.

But what about the sunk costs at the Gigafactory? Tesla can continue to use the existing space to assemble the battery packs for cars and Powerpack/Powerwalls. They are then free to develop the rest of it for vehicle production. (Call it Alien Dreadnought .75 instead of .5)

SpaceX and Solarcity will need room eventually let them use the excess space.

All this will do is make cars cheaper for other car manufacturers to produce and since they do not seem to be in a rush to make them (most car makers BEV's are slated for release somewhere in 2018-2022) it doesn't really matter either.

Bighorn |
January 20, 2017

Yawn

joemar10 |
January 20, 2017

I would think that buying anything, especially something as heavy as a battery, would quickly eat up he 5% cost difference, in shipping from China alone, not even considering the possibility of an inferior product. As particular as Tesla is on quality and safety, I don't think they would want to buy "bargain basement" batteries from China.

Then again, China does have a lot of experience making fireworks.

When China "proposes" vendors do something to cut costs, you come up with something like bad dog food, or inferior drywall.

rxlawdude |
January 20, 2017

Chinese quality <> Tesla's

cweber |
January 20, 2017

not sure if you guys are paying attention - we don't dance with China anymore... AMERIKA FIRST!!

SUN 2 DRV |
January 20, 2017

A lower price Chinese battery is only relevant if someone else decides to build a compelling EV using them to compete with Tesla. China could offer those batteries for free and there's no reason that would affect Tesla. If Tesla is better off using gigafactory batteries, they will. China's price is irrelevant....

RedShift |
January 20, 2017

So Tesla is a premium EV marker. It wants safe, high performance batteries that also last long.

Which of those qualities would you be willing to attribute to the Chinese batteries?

Between low quality and high shipping prices I can not imagine a scenario where their batteries are competitive in the BEV area.

Hoverboards and Note 7. Enough said.

RedShift |
January 20, 2017

Just tell me one thing: would you buy a Tesla today if it were to be filled with these cheap Chinese batteries. Would you?

carlk |
January 21, 2017

Yeah they can always cut the price but can they cut the price but at the came time to maintain the quality of the battery? It maybe fine for cheap Chinese EV since no one expect the car to last for long anyway but I doubt if they could make cheap batteries to last long.

Babaron |
January 21, 2017

Let' us not forget the very important change that is about to become a driving force under the Trump administration--DUTIES...esp for Chinese products. That, alone, will keep domestic battery production profitable for Tesla.

You can also save money on your kids' toothpaste or your dog's food by buying Chinese.

rxlawdude |
January 21, 2017

What's the problem, @Big. Everyone should have daily intake of melamine.

codyb12889 |
January 21, 2017

Maybe we can make the body of the car from radioactive scrap aluminum out of China as well.

People will love their $5,000 BEVs that glow in the dark, give you cancer, spontaneously burst into flames, and if you make 4 years it has degraded to a range of 3 miles per charge.

neilhamrin |
January 21, 2017

As always, Bighorn has said all that needs saying. Thanks to you Bighorn.

carlgo2 |
January 21, 2017

@SUN 2 DRV has it r right: Tesla batteries are used internally, at cost, which is going to be low.

Will China produce an EV cheaper than a Tesla? Of course. China needs cheap EVs and the government will do what it can to promote them for both domestic and export markets. Same for India too.

As mentioned by others, dumping stuff on our markets may be difficult.

Uncle Paul |
January 21, 2017

If Trump puts a 30% import tariff (like China does on our auto imports to them) then the USA made products will be a far better deal for US manufacturers.

If the tariff makes exporting US cars to China, Elon will set up local manufacturing of vehicles and batteries in China.

Babaron |
January 22, 2017

"If Trump puts a 30% import tariff (like China does on our auto imports to them) then the USA made products will be a far better deal for US manufacturers."

EXACTLY!

brando |
January 23, 2017

18650 batteries from China for my flash lights.
Can you trust/believe the ma ratings? No would be my experience.

PS- seen all the Chinese cars winning "best car awards" around the world? or in China?
Apple miracle is how they manage quality production in China, surely not easy.

McLary |
January 24, 2017

"Tesla batteries are used internally, at cost,"

That's not exactly true. Panasonic cells are used in Tesla batteries, with a guaranteed profit margin on every cell produced. Tesla must buy a minimum number of cells, even if they don't have enough sales to support the cell purchases. Tesla also has to buy a "safety stock"

The big risk to Tesla here is that they could be locked into significantly higher battery prices with the gigafactory. Frankly, I don't believe that this price reduction is even possible. However, grants, loans, subsidies, and dumping, are not beyond belief.

Also don't believe everything you hear about Chinese quality. At the low end, the quality is horrendous. Not far up the value chain, quality is on par with western standards, at lower prices. It is said that BMW has signed contracts to purchase Chinese batteries in the not too distant future. Do you really think that BMW would use batteries that would destroy their EV efforts?

Also, please note that anyone, including Panasonic, could have a major battery manufacturing issue. The Samsung batteries were not made in China.

Rocky_H |
January 24, 2017

@McLary, Quote: "Also, please note that anyone, including Panasonic, could have a major battery manufacturing issue. The Samsung batteries were not made in China."

An engineering design company did a teardown and analysis of the Note 7 and found that it seemed like bad design, rather than defective batteries was likely the cause of the fires. They had designed in almost no space margin because of aggressively trying to shrink down space. Having no room around the battery leaves no margin for expansion during charging and leaves no room in case of pressure on the case. This can cause the battery to get squeezed/pinched, which could short together positive and negative layers inside the battery.

OMG, thank you for this helpful information. I am going to sell all of my TSLA stock, which has been on-fire!

The above sentence was sarcasm. The next sentence is not.

TSLA shorts are getting crushed, destroyed, annihilated and must mount a dis-information campaign or accept their losses.

RedShift |
January 24, 2017

@rocky

The issues with battery size vs case was known earlier. That's why in case of two different makes, same issue surfaced.

@mclary

It's not that quality of batteries itself is an issue. It's the perception. Chinese cars were supposed to have taken over the American roads by now. Hasn't happened. Batteries are slightly different, but still, ultimately they are part of the car.

It's admirable that they have BMW is possible partnership. However we are talking about 2020. Things can change by then.

RedShift |
January 24, 2017

@mclary

It should also be noted that BMW has also partnered with Samsung SDI. They'd obviously want to second source this, as any company worth their salt would have wanted to.

Amperex Technologies - one of two battery suppliers to Note7.
"To be an international premier innovative technology corporation, rooted in the Chinese culture, excelling in the global green energy industry, while endeavoring to enrich the lives of our employees." see below link

Wall Street bankers, over paid CEOs, Harvard MBAs may be responsible for shareholder value, but it is the actual workers who are responsible for quality. Elon surely knows and sadly too many US companies don't. Hence ULA must buy Russian RD-180 rocket engines. US must hire Russia to put our astronauts into orbit. SpaceX has to sue US Air Force just to be allowed to bid on satellite launches.

ULA look them up on the internet for your self.

Silver2K |
January 24, 2017

By the way, I don't think this will hurt tesla at all, I just posted the article for coversation.

TeslaTap.com |
January 24, 2017

For USA sales, Trump may put some heavy tariffs on Chinese products and batteries. Not sure it will happen, but should it happen, Tesla will be in an even better place with the GF. Companies like BMW could end up huge losers for their chinese sourced EV batteries.

Tesla is the #1 car company as far as vehicles being made in USA and exporting cars outside the USA. Surprisingly BMW is #2 due to a huge plant in North Carolina. (According to the WSJ a few weeks back).

Bighorn |
January 24, 2017

@TT
I believe BMW is more South Carolina-centric.

McLary |
January 26, 2017

Brando the original batteries weren't Chinese, but of a faulty design. The second round were Chinese and had a manufacturing fault from tab welding.

If you think that the welding problem has not been fixed, then you better not buy any cheap goods with batteries in them.

I repeat, anyone can have a major battery issue. Tesla, is in fact, overdue to have some issue surface. The inclusion of, and potential increase of silicon, is in fact a high risk gambit.

NKYTA |
January 26, 2017

Not sure I missed this in above posts, but they said the price of the batteries in China would be much lower. I can definitely see this as a Chinese gov mandate (make very little profit you, company, you!), or subsidized by the gov.

Yeah, and then there is quality...

dchuck |
January 27, 2017

@McLary

Tesla may have battery issues with the new 2170 cells (Production, performance, etc...) but one of the reasons they have been so successful with the Model S/X is the use of existing 18650 batteries. Those were produced for years before Tesla started using them.

I don't know if i would classify adding more Silicon as a high risk, but any change in the chemistry is a risk. The good news, for those folks around here anyway, is that the packs can be swapped out so if there are problems with the cells it is fixable. (costly for the company, but fixable)